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ECB's Mersch: We're it not for our policies, the economy would have been worse
Debatable comments from Yves Mersch
Thursday's ECB: Draghi's 3-Point 'Groundwork'
The ECB meets on Thursday. Few, if any, are expecting fresh action. The economy has progressed broadly along the lines ECB anticipated. Growth is stable near trend levels. While deflationary pressures have eased, price increases remain minimal. With eurozone CPI at t 0.4% year-over-year, officials cannot be content with the progress.
Moreover, the latest bank-lending survey was disappointing. Credit conditions have weakened for the third consecutive quarter. The Composite Index fell to 12.67 in Q3 from 12.75 in Q2 and off from the 16.4 high in Q2 15. Despite the access to cheap funds via TLTRO II, bank lending to households has slowed from earlier in the year. The growth of loans to non-financial businesses also appears to have lost some momentum recently.
If the ECB did not seize upon the window of opportunity last month to provide more support, it most likely will not do so now. The most likely scenario is that while Draghi may lay some groundwork, any fresh action will probably wait until December when the staff forecasts are updated.
What is difficult for many investors to come to grips with is that Draghi and many other ECB officials, even if not all of them, support the combination of orthodox and unconventional policies, which they regard as effective. That is an important recognition. It means that the idea that the ECB will call an end to its efforts because they are ineffective are probably a non-starter from an intellectual and investment perspective. The issue is not really whether the ECB runs to the exit, but rather what it does next. The question is not what it ought to do, but what it is likely to do.
Although talk of tapering ran through the market like pink eye in a grammar school, few truly think that is a realistic scenario. A Bloomberg survey found 97% of the (50) economists surveyed expected the asset purchases to be extended beyond the soft March 2017 end date. Nearly as many (90%) expect the announcement to come at the December 8 ECB meeting.
Almost three-quarters of the Bloomberg survey expect the ECB to soften its self-imposed rules to ease the potential securities shortage by increasing the issue and issuer limits. This raises questions. If the former limits reflected prudent risk management, what does the dilution of those safeguards mean? How will more concentrated purchases impact the transmission mechanism?
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ECB Preview: Draghi Needs To Control Expectations
Expectations management will be ECB President Draghi’s principal task on Thursday. In this context, he will not have the option of repeating last month’s strategy of saying nothing. In particular, Draghi is likely to push back against any suggestion that there will be any near-term move to tapering bond purchases. He is also likely to pledge a full review of policy for the December meeting and maintain the aggressive commitment to meeting the ECB inflation target.
The most likely outcome is that the Euro will weaken, although great caution is needed given the risks of aggressive short covering on any disappointment. If looking to trade on dovish rhetoric, buying European equities would be likely to offer better value.
The ECB will announce its latest decision on interest rates on Thursday and there is no real chance that the main refi rate will be changed at this meeting.
The main focus should be on the bond-purchase programme, especially given increased market speculation over the programme’s future.
The ECB is facing the approach of several deadlines and a mishandling of short-term policy or market signals could trigger major instability within the Euro-zone.
As it stands, the bank has pledged to maintain the EUR80bn per month in bond purchases until March 2017 and for longer if necessary in order to meet the inflation target. As March 2017 approaches, the degree of market speculation surrounding the policy will inevitably increase.
The ECB originally imposed limits on the amount of bond that could be purchased with a limit of 33% of the total volume, while the national banks are unable to buy bonds, which yield less than the deposit rates, which currently stands at -0.40%.
The amount of bonds eligible for purchase is reaching very low levels, especially in Germany, which could run out of bonds within two months. There is a small chance that the ECB could cut the deposit rate to alleviate the stresses, although a temporary relaxation of measures would be more likely.
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ECB preview: Is the euro gearing up for an ECB taper tantrum?
The possibility of an ECB taper is going to be the hot topic at the meeting today
Anyone who was knocking around in 2013 will remember the market "taper tantrum" when the Fed hinted that they would start turning off the QE taps. As usual the market got itself in a bit of a tizzy several times trying to guess when and by how much the Fed would start winding down QE. Stocks threw a strop, EM & developed FX went potty and bond sellers went short and got their arses handed to them once again.
Now it's the ECB's turn following the erroneous Bloomberg headline at the beginning of Oct, that the ECB will taper. At the moment the market really isn't buying into the story that the ECB would start tapering anytime soon, otherwise we'd probably be trading at 1.19 not 1.09 but the seed has been sown and you can bet your last euro that that will be the main line of questioning at today's presser.
So is the taper story such a crazy one? Not at all but it has to be put into context.
1. Will the ECB eventually taper?
Going at the rate they are, of course it's likely, near whatever end date they set.
2. Will they taper or talk about tapering before March 2017?
Not while inflation is running at 0.4% and core at 0.8% y/y. Not while the economy is still pretty weak, there's high employment and so much tilt to the downside. There's no way Draghi is going to give any indication that they are looking to reduce QE as that will send the euro into orbit, and he doesn't want that.
3. What could Draghi say about tapering?
Here's the crux of it.
So, if we get anything new from Draghi, it's going to be along those lines.
What might be possible is that we get a taper that's not really a taper. The ECB might be worried about extending QE at it's current rate so what they might do is prime the market for an extension of QE but at a reduced rate. At the start QE was given 18 months and here we are with 5 left. Considering they've not been able to get inflation above 0.4% for over 2 years, they're hardly going to cut QE because they now think they'll meet their target in 5 months* (*the only thing that might get CPI up quicker is the price of oil rising). Lowering the amount of purchases but pushing the next deadline out for something like 2 years or more sends the message that they are going to stay at it until the job is done. After all, they can still stop it anytime if they hit their goals. That message keeps the euro in check and the easy money rolling, while buying them the time they need. It also gives them some breathing room on possible asset shortages as the demand pressure eases and stops prices rising/yields falling as much.
Announcing something shorter like a 6 month extension is unlikely to appease the market and stop the euro from taking off, as we'll be right in the same taper situation that we were in back in 2013.
For today, whether Draghi chooses to address the QE situation now of whether he passes over it until Dec is unknown but the press will badger him about it today.
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ECB minutes: Will be in a better position in Dec to decide on monetary policy stance
ECB minutes from the October 2016 governing council meeting
ECB’s Draghi: Sustained Inflation Rise Required
In a speech on Friday ECB President Draghi stated that the economy is recovering at a moderate, but steady, pace and the recovery has become more broadly based.
Draghi posed the question of whether the factors, which had allowed a recovery, are sufficient to deliver a sustained adjustment in the path of inflation.
In Draghi’s view, the uplift to prices provided by a gradual closing of the output gap, a sustained adjustment in the path of inflation still relies on the continuation of the current, unprecedented financing conditions.
The profitability of the Eurozone banking sector and relative weakness of inflation dynamics remained key concerns with headline inflation of 0.5% still well below the bank’s target. Although the headline rate will increase over the next few months, this will be primarily due to base effects.
Draghi’s main message, again, was that the ECB would continue to act, as warranted, to secure a sustained convergence of inflation towards 2.0%. He also repeated his call for the restoring of a sense of direction.
The recent comments from ECB officials have shown a slight shift of emphasis with a focus on the need to secure a self-sustained increase in inflation and not just reaching the target with the risk that inflation quickly turns lower again.
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Draghi Says ECB Cannot Yet Drop Guard On Eurozone Outlook
Eurozone policymakers cannot be sanguine about the economic outlook despite the moderate recovery due to the persistence of geopolitical risks, profitability erosion of banks, weak inflation dynamics and the high reliance on monetary policy stimulus, European Central Bank President Mario Draghi said Friday.
"Even if there are many encouraging trends in the euro area economy, the recovery remains highly reliant on a constellation of financing conditions that, in turn, depend on continued monetary support," Draghi said in a speech at the European Banking Congress in Frankfurt. "We cannot yet drop our guard."
"The ECB will continue to act, as warranted, by using all the instruments available within our mandate to secure a sustained convergence of inflation towards a level below, but close to 2 percent."
The ECB Chief also pointed out that there was still "significant degree of uncertainty" regarding the economic and inflation outlooks.
Defending low interest rates, Draghi said banking system inefficiencies caused by structural and legacy challenges could have been exposed by the low interest rate environment.
"But they have certainly not been created by it," he added.
Regarding the price stability outlook, Draghi said the persisting output gap continue to keep inflation dynamics weak. "We do not yet see a consistent strengthening of underlying price dynamics," he said.
In future, the ECB's assessment will depend on whether there is a sustained adjustment in the path of inflation towards the aim of 'below, but close to 2 percent', the ECB President said.
"And that means that inflation convergence towards 2 percent is durable, even with a reduction in monetary accommodation. Inflation dynamics, in other words, need to be self-sustained," Draghi added.
"Monetary policy remains a key ingredient in the reflation scenario we foresee for the euro area in the coming years."
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ECB’s Draghi Provides No Hints at December Policy
In prepared remarks to the European Parliament, ECB President Draghi maintained his recent commentary that the economic recovery was proceeding at a moderate pace and his comments were broadly in line with the ECB minutes from October’s meeting published last week.
He also confirmed that the ECB was committed to providing strong monetary accommodation. According to Draghi, the return of inflation towards the objective still relies on the continuation of the current, unprecedented level of monetary support.
The ECB President also continued to push for reform given that structural challenges are holding back a more dynamic expansion of the Euro area economy. Indeed, the overall stridency of Draghi’s rhetoric has continued to intensify over the past few weeks, especially with concerns that the window for action is closing fast, especially with key German and French elections next year.
Draghi remained concerned over the low level of bank profitability and called on the European Parliament to engage in financial-sector reform to help strengthen profitability within the banking sector.
Draghi overall maintained a neutral tone and he is not prepared at this stage to offer strong hints over the likely policy action at December’s policy meeting. There were also no attempts to steamroller the ECB Council into policy action. The comments will maintain expectations that the ECB is not planning to announce some form of bond-buying extension, although the details are still in discussion.
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ECB’s Draghi: Options Will Be Assessed At December’s Meeting
In his opening remarks to the European Parliament’s Economic and Monetary Affairs Committee, ECB President Draghi concentrated mainly on structural issues rather than addressing monetary policy. He also gave no specific hints on December’s policy meeting.
He had been asked at the previous session to discuss the implications of the UK Brexit vote and he commented that it was difficult to predict the precise implications of the UK decision given that it will depend on the timing, progress and final outcome of the talks. He reiterated that it was essential to have clarity on the negotiation process as soon as possible in order to reduce uncertainty.
He also insisted that it was imperative for the Single Market to preserve the homogeneity of rules and their enforcement.
As far as the Eurozone is concerned, Draghi repeated his recent comments that the Eurozone economy continues to expand at a moderate pace despite the adverse effects of global economic and political uncertainty. He remained confident that this upswing would continue, not least because of the ECB monetary measures.
Draghi stated that the policies of the Trump administration would be monitored closely, while the ECB would assess policy options at the December meeting. Draghi was also confident that the bank had the tools necessary to address bond scarcity.
He stated that there were risks to financial stability from an extended period of low interest rates, while the greatest risk of financial stability in the short term would come from weak Eurozone growth rather than interest rates being too low.
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ECB sources: ECB more likely than not to extend QE in December
As reported by MNI